Seth Chalnick

The Golden Rule of Defaults: Banks vs. Consumers

A couple of things...

First, it seems I made an error when I wrote that this transaction was for $6.5b... it sounds like it was more like $1.25b. I guess I got confused because it's the second time in a month MS (didn't) DEFAULT on an agreement. The first one was for $6.5b.

Second, as john1940 comments correctly, Bloomberg unemotionally describes the transaction. And while I agree that Bloomberg unemotionally reports that MS states that they were not liable for the debt... it is the point of this article to juxtapose the MS statement with the way most people view the idea of liability for the repayment of a loan that was arranged for the purchase of assets... for which MS stakes full claim in the event of appreciation.

A pretty relevant concept worth debating, especially as the buzzwords "strategic default" gain national attention.

How Bloomberg Fabricates U.S. Housing Numbers

To those who say that actual foreclosures have not increased by as much as the author says.

That's not the point.

The point is that loan defaults have been increasing. And the problem is that there is no answer for the defaults. So the banks aren't even foreclosing anymore.

How Bloomberg Fabricates U.S. Housing Numbers

To the folks who think the low LIBOR rates are going to help things for the time being, you are missing something subtle but huge, which most of America is also missing. 50% of all re-sets will also switch to p&i re-amortized over the remaining 25yrs.

This creates a substantial payment shock even with the rate being lower. When the rate gets back up there, fogettaboudit. If you are one of the "lucky" ones who still gets the i/o option for another 5 years... yes it's true, your monthly pmt goes down while the rates stay low... good luck though in another 5 years when the remaining balance re-amortizes to the remaining 20yrs.

It does not matter if you are "well insulated". It matters that even a small percentage of your neighbors (in real life a huge percentage) are not. They will go to refi. They will not be approved. They will try to short sell. They will not be able to. They will walk. Your property value will go down for real this time.

How Bloomberg Fabricates U.S. Housing Numbers

Bravo Mr. Nielson, for publishing the web's first coherent explanation for banks holding back inventory:

"Now, with the U.S. housing market collapsing, these credit default swaps are being triggered. Selling these foreclosed properties locks-in the banks' losses – causing these massive obligations to come due."

Are swaps and derivatives so confusing that the investor consensus assumes that all toxic assets have already been baked into the market outlook?

This is not a rhetorical question.

We witnessed subprime havoc and now it seems most asset manager types have this idea that the toxic assets were all bundled in with prime assets… since nobody knew what was what, and that everything as a whole has already been written down.

But I used to work on Wall Street, and I know that many asset managers are basically just sales guys who push what their analysts tell them to push, and that many analysts types are myopic materialistic ivy league model writers who are driven by peer pressure and perverse incentives to tow the company line.

I'm just a residential real estate guy... but it seems to scream out to me that the prime loans have not yet defaulted... so how could they already be discounted? The subprime assets weren't written down until people defaulted on making payments.

And I see now, with first hand experience, even while everyone is making the call that real estate has bottomed… that a major portion of non-performing loans that defaulted to date (I'd actually say the majority of them) have not yet been dealt with. The mark to market accounting change and the not so subtle short supply of inventory artificially created demand compared to same period last year results... but fundamentally nothing has even changed.

And now we are starting to see the 5yr i/o loans expiring and this bucket of loans is approximately 3 times LARGER than the subprime bucket… with average loan amounts that are LARGER than subprime... and even the same subprime neighborhoods are mostly comprised of hard working blue collar 5yr i/o holders who haven't even been tested yet... unless you count the test of still paying your mortgage on time even though you are earning about 30% less than before while debt payments that are higher than before… even though your deadbeat subprime neighbor walked AFTER getting a loan mod that you deserved but they received and then re-defaulted on because their credit was already shot, etc.

If the 5yr i/o pool is 3 times larger… and it’s not baked in yet… and the default rate is much greater than expected, though only by people who subjectively gauge and report the market’s expectations rather than looking at fundamental math and the recent blueprint that is called the subprime crisis… it seems that smoke and mirrors are perhaps the best chance we may have after all. It’s all starting to make sense now.